Destination India: Unpacking the Potential of the Nation's Hospitality Sector

Industry Overview

The Indian travel and tourism industry is set for steady growth, driven by multiple factors highlighting its potential. In 2023, the industry's contribution to the GDP was estimated at around INR 16,350 Cr., expected to reach INR 42,000 Cr. by FY2028. International tourists in India are projected to reach 30.5 million by CY2028, indicating the country's increasing appeal as a global destination. The demand for Indian medical tourism is also anticipated to grow at a 19% CAGR between FY2022-2032, leveraging the nation's healthcare facilities and cost-effectiveness. Finally, domestic travel is set to reach INR 33,300 Cr. by FY2028, fueled by rising incomes, changing lifestyles, and a growing appetite for travel among Indian consumers.

Indian Branded Hotel Landscape

As of FY23, India had a branded hotel inventory of approximately 170,000 keys. The top 10 hotel chains and brands dominate this landscape, collectively managing over 130,000 keys, which accounts for a staggering 75% of the total branded hotel inventory in the country. Among the top 10 hotel chains, which collectively manage approximately 130,000 keys, Marriott International commands a 22% market share, solidifying its leadership position. IHCL follows closely with a 17% share, while Radisson Hotels and ITC Hotels occupy significant positions with 12% and 9% shares, respectively.

Key Drivers and Investment Thesis

Supply-Demand Dynamics: The industry is expected to witness a supply growth of 5-7% CAGR, while demand is projected to grow at a higher rate of 8-10% CAGR over the next 3-5 years, indicating a favorable supply-demand balance.

Average Daily Rate (ADR) Growth: The branded hotel industry is anticipated to experience an 8-10% ADR growth in CY24, with a projected pan-India ADR CAGR of 6-8% over the next 3-5 years, driven by higher ADR growth in larger cities (8-12% CAGR).

Untapped Potential in Tier II/III Cities: Upcoming supply additions are skewed towards Tier II/III cities, with only ~25% of upcoming keys signed for Tier I cities (vs ~40% pre-Covid), indicating significant growth potential in these emerging markets.

Diversified Supply Segment: The upcoming supply is diversified, with ~5-7% in the luxury segment, ~80% in upscale, upper midscale, midscale segment and the remaining ~15% in the budget segment, catering to diverse customer segments.

Long Runway for Growth: Despite India's large population, its branded hotel room stock stands at only 1% of the global share, and its commercial airplane stock is at 2%, implying a long runway for growth in the hospitality industry.

Infrastructure Development: The doubling of airports (to >250), tripling of domestic passenger traffic (to >450 million), and tripling of commercial airplanes (to >2,000) over the next 4-5 years will drive demand for hotel rooms across the country.

Potential in the Cruise Tourism Segment: The Government of India estimates the market size for cruise visitors to reach 1.2 million by 2030-31, driven by the government's plan to establish five new cruise terminals and increase the number of cruise ships to 1,000.

Travel Agencies: The presence of agents is expected to remain dominant, maintaining a consistent market share of over 50% between FY24-27. This translates into a cumulative booking value of ~INR 53,400 Cr. in FY27, highlighting the key role played by agents in the hospitality industry.

Government Initiatives to support the Hospitality Sector

• Lowering of GST on hotel rooms with tariffs of INR 1,001 to INR 7,500/night to 12%; those above INR 7,501 to 18% to increase India’s competitiveness as a tourism destination.
• Providing the facility of e-Visa for 7 sub-categories i.e. e-Tourist Visa, e-Business Visa, e-Medical Visa, e-Medical Attendant Visa, e-Conference Visa, e-Ayush Visa and e-Ayush Attendant Visa for the nationals of 167+ countries.
• The Ministry of Tourism has collaborated with the Ministry of Civil Aviation under their RCS-UDAN Scheme. As of Dec’23, 53 tourism routes have been operationalized to improve air connectivity to tourist destinations.
• GOI has allocated INR 2,390 Cr. to the Ministry of Tourism in 2023-2024, including INR 1,730 Cr. for tourism infrastructure development, INR 238 Cr. for promotion and branding, apart from INR 1,400 Cr. for the Swadesh Darshan Scheme.

Major Players in the Hospitality Industry

Indian Hotels Company Limited (IHCL): IHCL, the largest hotel chain in South Asia with over 32,000 rooms, stands as a prominent force in the industry. The iconic Taj brand, recognized as the World's Strongest Hotel Brand by Brand Finance Hotels 50 Report 2022, is the company's flagship offering. IHCL has unveiled its three-pronged 'Ahvaan 2025' strategy to drive profitable growth, focusing on re-engineering margins, and re-structuring the portfolio. The ambitious goals include expanding to 300+ hotels, achieving a 33% EBITDA margin, and deriving 35% EBITDA contribution from new businesses and management fees by FY2025-26. The Taj brand, the industry-leading ESG+ framework 'Paathya,' and a strong digital focus are key enablers underpinning this strategy.

Chalet Hotels: Chalet Hotels Limited, part of the K Raheja Corp group, is an owner, developer, asset manager, and operator of high-end hotels in key metro cities across India. The company's portfolio comprises 10 fully operational hotels representing 3,052 keys across mainstream and luxury segments, along with 1.2 million square feet of commercial spaces near the hospitality assets. Chalet also has a robust development pipeline, including plans to add 375-400 rooms in New Delhi and 140 additional rooms converted from an erstwhile office space in Bengaluru. The hotel chain aims to have over 3,700 keys by FY27.

Lemon Tree Hotels: LT Hotels operates over 100 hotels with more than 9,700 rooms across 64 destinations in India, catering to both business and leisure travelers. In October 2023, Lemon Tree unveiled Aurika Sky City, featuring a 669-room hotel, the largest in India by room count, near Mumbai International Airport. The prime location and upscale amenities position Aurika MIAL to achieve an Average Room Rate (ARR) of approximately INR 12,000-15,000 and maintain occupancy rates above 70%. LT Hotels is a Mool recommended stock.

Easy Trip Planners: Easy Trip Planners offers end-to-end travel solutions under the brand "EaseMyTrip," including airline tickets, hotels, and holiday packages. The company partners with over 1 million hotels in India and globally. During Q3, the core air travel booking segment recorded 2.26 lakh bookings, while the hotel segment recorded 92,000 bookings. For the 9MFY24 period, there were 83.7 lakh air segment bookings, and hotel night bookings increased by 49% year-on-year to 3.7 lakh. In the next 4-5 years, the company expects to serve 50 million+ customers across India.

The Indian hospitality sector has emerged as an attractive investment opportunity, buoyed by resilient demand drivers, favorable supply-demand equilibrium,  conducive government policies, and the strategic initiatives of key industry players.

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